The view on Brazil from economic growth and creditworthiness perspectives has continued to take hits throughout this month, and prospects for improvement appear somewhat dim.
US-based credit ratings agency Moody’s Investors Service changed Brazil’s rating outlook to “negative” from “stable,” though it affirmed the nation’s “Baa2” bond rating for now. The three main factors cited by analysts at Moody’s were as follows: a sustained reduction in economic growth with few signs of a “return to potential” in the coming months, a marked deterioration in investor confidence and its effect on capital formation, and new fiscal challenges that are making government debt reductions increasingly difficult.
Brazil, only a couple of years ago still an economic success story on the global stage, is now considered much more vulnerable than other major nations to “sudden changes in global risk appetite.” Moody’s did compliment Brazil’s resilience to financial shocks through its reserve buffers and the underlying credit benefits that are part-and-parcel with an economy of its size and diversity. Of help, if predictions by the ratings agency and others analysts are true, is that a coming change in political regimes could usher in a more market-friendly business environment, boosting growth potential over its current realistic capabilities.
The Moody’s outlook downgrade came about a week after the HSBC Brazil Services Purchasing Managers’ Index fell to a two-year low of 49.2, in what is become a less rare dip into contraction territory (below 50). “The business expectations index slumped back to the lows of April and May after registering much more favorable levels during the FIFA World Cup, said HSBC Chief Economist for Brazil Andre Loes. And despite an sizable increase in the HSBC Brazil Manufacturing PMI to 50.2 in August, “new orders remain flat relative to the last month, suggesting that the outlook for the sector remains weak,” Loes noted.
- Brian Shappell, CBA, CICP, NACM staff writer